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Posts Tagged ‘economic models’

One year ago, the entire American banking system was on life support.  It was only through the intervention of the Federal government, using the promise of a semi-infinite supply of tax dollars that some of the banks survived.  If this infusion of billions and billions of dollars of cash had not been made our entire banking system would certainly have collapsed. The question we need to ask – but we haven’t – is this: is there a message here?

Thanks to the extreme measures the Federal Government took with the TARP program we still have some functioning banks, but a more important thing to consider is this: do we have a functioning economy?  The answer to that question is to be found in the history of the Dow Jones Industrials average for the past forty years.  The thing to note is the behavior of the Dow before the year 2000 and after the year 2000.  Notice anything? How about those two massive bumps?  I mean the one about ten years ago and the one a year ago. You know what those are? Those are bubbles, the signs of an economy that is being artificially and irrationally stimulated – an economy on drugs.

The other thing to note is that Bump #1 didn’t start in the year 2000, it started long before, its roots were in the 1980’s. Until then the Dow had been pretty tame, slowly inching upward ever since World War II. So what happened in the 80’s? The government created 401k plans and artificially stimulated massive investment in the stock market by average people who would have otherwise never invested in the market.  The same thing happened again with the 529 plans.

However, for the people who run our government that wasn’t enough. So they changed the tax laws again to provide a massive income tax credit for anyone who sold their house – and they made a provision so that you could do that every two years. That artificially fired up the housing market.  Then we had also the tech boom – a boom that the Fed actually opposed.  They didn’t like all these upstart companies on the NASDAQ sucking up all the investment money from the old money firms that made up the DOW.  So, the Fed killed Tech by ratcheting up interest rates until Tech collapsed.  After Tech was a smoking ruin, the Fed drastically cut interest rates and thereby fueled the housing bubble even more.

The thing to realize is that our economy, for the past twenty or thirty years has been a dying economy, kept alive by infusions of money from unsuspecting citizens contributing to their 401k plans and their 529 plans. It has been kept alive by people buying and flipping houses every two years.  It has been kept alive by one scheme or another while the true engine of our economy, manufacturing, was exported to China.  But nobody cared because you could buy Chinese stuff cheap at Wal-Mart and everyone was doing well in the stock market or the housing market.

Well, the party’s over, isn’t it?  True, the banks are alive again, having dined on the lifeblood of the taxpayers.  However, there are very few green shoots out there. Does anyone have an idea where our new economic engine will come from? Is it possible for our government to think of another economic scam that will power the country for another ten years? Or, are they running out of ideas?  Does anyone really think we can get by on our American manufacturing capability?  Let’s face it we just don’t make enough stuff anymore.  The future of manufacturing, at least for the next twenty years or so is in Asia, not North America. So what is our government thinking? Well, since the only thing they saved is the banks, one must assume that they figure that’s where the money will come from – i.e. lending at interest. But, let’s face it, the lendees are unlikely to be Americans, are they? No, the money (that’s your tax dollars that you gave them as TARP rescue money) will go to developing countries so they can develop their businesses and then pay back the banks at high interest rates.

Meanwhile, back at the ranch, what can we expect?  The truth is: not much. Our Capitalist engine doesn’t have a transmission anymore. In fact we lost it a long time ago.  We’ve just been coasting along.  The thing we don’t want to…don’t like to…admit, is that we are witnessing the failure of Capitalism.  Unregulated Capitalism – something we have had from many years – soon morphs into Predation: the strong preying on the weak. We have witnessed that. The Predators in our society, i.e. the financial community, have feasted on us.  There’s not much blood left to drink anymore.  They’ll move on, looking for victims in other countries – still propped up by our government.

Here, in the USA, we won’t admit Capitalism has failed – we can’t – it’s like denying religion or something. It’s like being unpatriotic.  It’s like stepping on the flag.  Capitalism is sacred in America – beyond criticism. It’s hard to figure why – after all, can’t we all see that it doesn’t work?  We can’t we simply acknowledge that it is an economic theory and system that just doesn’t work?  I know, I know ,we’re all afraid of the other two “isms”, Socialism and Communism. So we stick with our belief in Capitalism, even though the wheels have come off and we no longer have an engine for our economy – we still believe. We believe. We believe even though we are in a screaming nose dive.

If the past twenty or thirty years have proved anything, they have proved that unfettered Capitalism is a disaster. For proof just look at your bank account.  If we can’t bear to consider Socialism or Communism, then there is only one solution.  We need a new “ism”.  Call it Americanism if you like.  We need a new approach to economics. We need creative minds in our government who can see beyond the payoffs from lobbyists and the pressures of the fat cat bankers.  We need a new voice in economics, a voice of intelligence who can lead our economic recovery with a sound understanding of what went wrong. We don’t need idealogues, whether they are Capitalists, Socialists, or Communists; we need realists: practical, intelligent people who can understand what is broken and fix it. We simply need a new way of running our economy, a new economic theory for the 21st Century.

The question is this: do we have the intelligence and the courage to change the way we do business? Because if we don’t, it won’t be long before we don’t have any business.

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It was less than thirty years ago that the American people elected a movie star to become President. His theory of  “supply side” economics, also called “trickle down economics” and “Voodoo economics” resulted in a short term spike in prosperity followed by a realization that we had run up a huge mountain debt for the country.  Meanwhile, in an attempt to keep up with the flood of U.S. government spending on defense, the Soviet Union pretty much went bankrupt and eventually went out of business, thus generating the new capitalist  nation we now call Russia.

Today, as our ship of state founders, having rammed an economic iceberg of frozen mortgages and credit, we are a divided nation – as least as far as economic theory goes. On one hand we have Republicans who, more or less, advocate more Voodoo economics by cutting taxes on businesses and the rich folk.  The theory is that if you give the rich folk a lot of money they will hire more people – instead of just banking the profits. On the other hand the Democrats are looking to FDRish, New Dealish, concepts including lots more government regulation of the financial sector, direct injections of money into the economy by construction projects, and other means.  Both Democrats and Republicans seem to like the idea of bailing out the banks some more, in one way or another. The question I have is this: isn’t this all a little Voodooish too?  I mean: where is the science?

In the United States we have quite a few supercomputers, massive conglomerations of processing units that can perform umpteen zillion computations per second.  They are great for predicting the behavior of nuclear reactions when there are lots of variables and lots of things happening at the same time.  They’re great for predicting the outcome of complex processes, like what will the weather be tomorrow, given that we have inputs, every second,  from hundreds of weather stations scattered all over the place.  So, if I might ask, why doesn’t our government create a vast working model of our economy in a supercomputer? Then the Democrats and Republicans could poke a variable here and there and see what comes out the end.  We could test John McCain’s economic theory and simulate the results with high reliability.  We could do the same with President Obama’s.  We could even test Rush Limbaugh’s – if he has one.  The problem is we don’t have a national or world economic model running in a supercomputer – at least I haven’t been able to find one, and I haven’t heard any politician saying to the other, “Hey, let’s put your idea into the national supercomputer and see what happens. Let’s see whose proposals will work the best, and then we’ll use that!”

It seems that Ben Bernanke does have a sort of economic computer model that works sort of OK.  But it isn’t a supercomputer model, capable of incorporating lots and lots of variables. There is a report that the Argonne National Laboratory is now beginning to take steps in the creation of an economic model that runs on their supercomputer, which is one of the fastest supercomputers in the world. This could be a major step forward in getting us away, for once and for all, from politicians making economic decisions based upon unproven ideology, constituent self-interest, or just Voodoo reasoning.  While we wait for the Argonne supercomputer programs to be written, perhaps we could ask the Democrats and the Republicans to give their suggestions into Ben Bernanke and have him put them in his program and see what it predicts – just for fun, you know?

It seems like such an obvious idea – using our national supercomputing capabilities that we have had for many, many years to model our economy. It makes one wonder why we didn’t do this twenty years ago. I suppose it’s a good thing we weren’t doing Voodoo nuclear engineering twenty years ago, but it’s long past time we got past Voodoo economics too,  and began studying economics as a multi-variable science, just like the weather.  With enough computing power, and the application of real science, we should be able to model, create, and maintain a stable, growing economy for a long time to come.  Too bad for the politicians, though, I wonder what they would have left to debate about then?

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